cbc.ca (© Copyright: (C) Canadian Broadcasting Corporation, http://www.cbc.ca/aboutcbc/discover/termsofuse.html#Rss)
Updated: Mon, 31 Mar 2014 05:08:56 GMT | By CBC News, cbc.ca

End of overseas tax credit may hurt mining, resource sectors



**FILE** In this Feb. 13, 2006 file photo, explosives blaster Shawn Snell runs detonation lines at Barrick Corp.'s Ruby Hill gold mine in Eureka, Nev. On June 14, 2008,Toronto-based Barrick Gold Corp., the world's largest gold producer, offered $350.9 million U.S. to acquire oil and natural gas producer Cadence Energy Inc. of Calgary. Barrick said the buyout would act as a "long-term economic hedge" of about one-quarter of its direct oil consumption and a "significant" portion of its direct natural gas consumption.Barrick said. Douglas C. Pizac/Associated Press

**FILE** In this Feb. 13, 2006 file photo, explosives blaster Shawn Snell runs detonation lines at Barrick Corp.'s Ruby Hill gold mine in Eureka, Nev. On June 14, 2008,Toronto-based Barrick Gold Corp., the world's largest gold producer, offered $350.9 million U.S. to acquire oil and natural gas producer Cadence Energy Inc. of Calgary. Barrick said the buyout would act as a "long-term economic hedge" of about one-quarter of its direct oil consumption and a "significant" portion of its direct natural gas consumption.Barrick said. Douglas C. Pizac/Associated Press

The mining and metals industry has seen better days. At home and around the world, the sector has lately been in a slump brought on by various factors, including low commodity prices, inflation and the ever-present challenge of finding, hiring and retaining the right people. 

Whether digging for nickel in Sudbury or gold in Africa, it's hard to find skilled workers. 

And it's going to get harder — not just for mining companies but for oil and gas corporations and others in the resource sector — as Ottawa phases out its long-standing overseas employment tax credit (OETC). 

The credit once gave a hefty break to Canadian residents who spent at least six consecutive months of the year outside the country working on a contract for a Canadian firm in one of several industries, including natural resources, construction, installation, agriculture, engineering and United Nations projects.

It eliminated80 per cent of income tax on the first $100,000 that employees earned working on those contracts (in salary, wages or other remuneration), an appreciable perk which for many helped offset the drawbacks of living in remote places like Burkina Faso. 

Which is exactly why it was introduced in 1979. Ottawa wanted to nudge Canadian companies onto the world stage by making it easier to to recruit talented staff. But it's being phased out. The credit will be worth only 60 per cent for the tax year 2013, 40 per cent for 2014 and so on until, by 2016, it will be just a fond memory. 

Added costs

So what's a company to do? Shed the Canadians in favour of cheaper but sometimes less-reliable foreign workers? Or try to keep them by paying a lot more in compensation, offsetting the loss of the OETC? 

Added risk or added expense — both unwelcome prospects in a down market. 

And what about the roughly 7,000 Canadians who claimed the credit in 2012, whose take-home pay is about to go off a cliff?  

An analysis from the consulting firm Deloitte warned the costs stemming from the loss of the OETC and Quebec's similar OED "may be substantial and should be taken into account by companies bidding on projects." 

Under the full-blown OETC/OED, Deloitte estimated an employee making $100,000 in foreign income paid just $5,600 in tax. Once those credits are gone, the same employee will pay an estimated $31,200. 

The problem is "high on the agenda of all resource-sector companies," says Jo-Anne VanStrien, a partner with Ernst & Young Tax Services. 

VanStrien predicts the larger companies — think Barrick Gold and the like — are more likely to be recruiting workers from the global talent pool and thus will be able to adjust to the change with relative ease. 

Contracts that were signed prior to March 29, 2012, when the elimination of the OETC was first announced, are not subject to the gradual phase-out. Those employees will continue to enjoy an 80 per cent break through tax year 2015, but nothing beyond that. 

This is good news for many in the mining sector, which tends to have its projects lined up years in advance.

"Those mines or projects were probably already in place," said VanStrien.

The change will be felt sooner in sectors with shorter turn-around, like engineering. 

VanStrien suspects engineering firms "will likely struggle with this, somewhat."

"It's the nature of their business to be constantly looking for new bids," she said. 

Some might choose to end residency

The loss of the credit will also be hard on smaller mining companies that have until now relied heavily on the OETC to attract Canadians and don't have the resources to effectively recruit from abroad, VanStrien said. 

"You want to go with people who know your company's structure, know your team, before you send them overseas," said VanStrien. 

As for the employees, some might decide it makes more sense to no longer be resident in Canada, owe Ottawa nothing, and instead pay the presumably more modest taxes wherever they happen to be posted. They don't pay much in Panama, for example. 

VanStrien says she got a few phone calls along those lines when the phase-out was first announced. "It comes down to: pay higher taxes or break ties," she said. 

"Companies will have to look at this and not leave it up to the individual to decide how to adjust." 

more video